How To Beat Wall Street

If anything in politics has been obvious over the past decade or so, it is that the Wall Street culture of greed has sucked in the United States Congress and bought itself a good deal.

Now that those same hucksters (a thief in a three thousand dollar suit is still a thief and a stockbroker is always a huckster) almost succeeded in bringing down the world economy, and are on the verge of doing it again as they resume their worst practices, the Congress is making noises about financial reform.

But as long as Congress is advised and informed by the financial shuck-and-jivers of the banking industry, there can’t be meaningful reform.

But although Washington is more willing to regulate now than in years past, one thing has emphatically not changed: the power of the banking industry to fight back. All of the techniques honed over the past few decades have been evident in full force over the past year.

One technique is the use of complexity. The modern financial world is complex, and most of the experts work on or for Wall Street. When it comes time to draft new legislation governing highly technical topics such as derivatives, those insiders have a clear advantage over most congressional staffers. In November, William Greider described how derivatives dealers wrote the draft legislation reforming regulation of derivatives and funneled it into Congress via conservative Democrats on the House Financial Services Committee. Administration officials such as Gary Gensler, chair of the U.S. Commodity Futures Trading Commission, have fought to close the loopholes in that draft bill, but the Senate bill introduced by Christopher Dodd in March contains its own new exemptions.

Any two of these bright boys from Wall Street are brighter than any ten Congressmen and Senators. No matter how detailed the law the Congress writes about any derivative or class of derivatives, the bright boys from the banking industry will a) find a way around it and/or b) just create something else not covered by the particular law.

Trying to regulate the particulars of the finance game is a losing proposition for the Congress and for the American people. Those people running the game on Wall Street are thieves, sociopaths, and con men, and they are smart thieves, sociopaths, and con men. To hold them accountable and stop their depredations and destruction requires a different mind set, and a Congress smart enough to understand the problem.

One basic thing that has to happen is that banking and investment have to be separated, as the repealed Glass-Steagall Act did before the Clintonista regime dumped it in its bid to make nice with the Republicans. Joe Lunchbox’s savings account doesn’t get to be tapped by the con artists to fund their investment schemes. Period. End of story. Hands off.

Now if Joey L. wants to invest his money, that’s his business and his choice. Win or lose, he lives with the consequences.

But to protect Joe Lunchbox the Congress has to back off.

Instead of trying to write detailed laws that cover every contingency of every lunatic deal the con artists create to steal money, Congress should instead legislate a set of basic principles.

Let the Wall Streeters have their schemes, but make it clear to them, in law, that if they lie, if they cheat, if they misrepresent, if they manipulate, if they fail to fully disclose all the details in language a sixth grader can understand, they will have committed felony fraud. It doesn’t matter what the deal is, it doesn’t matter what the financial instrument is, the wheelers and dealers must disclose everything, fully, and fully transparently, and make the disclosure easily and readily accessible, and can not misrepresent any aspect of the matter. To fail to do such disclosure would be the crime.

And, of equal importance, the executives and the board of directors of these corporations should be held personally and legally responsible. No hiding behind the corporate veil. If the company violates the principle of open and full disclosure, the CEO goes to trial, the VPs go to trial, the Chairman and his buddies go to trial. And thence to jail, and their personal fortunes go to pay the damages, right along with the company’s funds.

Joe Lunchbox gets the information he needs to make an informed decision about whether to invest, and he knows that if The Suits rip him off, they will have to pay. The same principles would hold in transactions between corporations, and for any foreign company or offshore company that wants to do business in the United States.

The advantage of such lawmaking is that it leaves no wiggle room. The law attacks the heart of the crime, rather than the peripheral details, and the lie is the heart. And the law gives the cheats an incentive to go straight, rather than go straight to jail and the poorhouse. Enforcement becomes a lot simpler: rather than fuss about niggling details for years in court, the prosecution needs only to demonstrate a failure to fully disclose in a fully open manner.

Trying to regulate Wall Street is like trying to stuff the Great Lakes into a teacup. The criminality will just overflow and drown the investors. Regulate the key behavior instead. Let them create the most complicated investment schemes they want. But make sure that they disclose all the details in language a sixth grader can understand. And punish them if they fail to do that.

And add one further protection for the country. Limit the size that any one institution, or close network of institutions, can attain. Ensure that any of these institutions can fail, that they will be allowed to fail, without endangering the national, or international, economy.

The bankers want to hide behind complexity. The only way to smoke them out and castrate them is to use the knife of simplicity.

A colleague is resigning to take a fellowship in finance at a big school back East. Much of my job involves statistics, and my friend insisted that I would be great at finance, as it involves mostly “developing mathematical models that support absurd money-making schemes.”

And as far as anyone being more intelligent than Congresscritters, I think one would be hard-pressed to find a profession with a lower average intellect.